Distribution of Natural Capital Financing in Markets

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2024-04-26

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Abstract

Natural capital finance is an emerging space wherein natural resources are conceptualized as assets that contribute to economic productivity through the provision of ecosystem services. Natural capital, also referred to as natural assets, stocks fall into four main categories: (1) Agriculture, (2) Biodiversity, (3) Fisheries & Aquaculture, and (4) Ecosystems & Forests including soil, minerals, and animals, and significantly impact the sustainability and economic well-being of businesses and nations. It is essential to understand the role that natural capital stocks play in providing various necessary ecosystem services, which in turn reduce climate change-related investment risks. Additionally, building investment and conservation cases around the existence value of natural capital by measuring ecosystem services provides a mechanism to drive investment into ecosystem restoration and conservation. This project is an exploration of various ecosystem services, methods for quantifying their value in target ecosystem types, and investment frameworks for natural capital as an asset class. We conducted this project in collaboration with Ortec Finance, a leading global provider of technology and solutions for risk and return management, to better understand the value of natural capital and the potential for reducing climate change-related risks through the implementation of conservation and restoration projects. Our team's objective was to contribute to Ortec’s knowledge base of how various natural capital stock types influence global economic activity, considering ecosystem service quantification, climate-related risks to ecosystem service provision, and any corresponding investment risks. Chapter 1 provided a first-pass valuation of the carbon sequestration potential of terrestrial forests in South Carolina, with the results highlighting the feasibility of using open-source models and data to assess the environmental and economic value of terrestrial forest ecosystems, presenting a proof of concept for potential future applications in the client’s target regions. Chapter 2 highlights the critical ecosystem services provided by mangroves, such as coastal flood protection and corresponding asset protection, categorizes various climate-related risks and environmental thresholds impacting mangrove populations, and examines investment frameworks for mangrove natural capital investment. Chapter 3 highlights the value created by the agricultural sector in Brazil, how the agricultural expansion is destroying globally significant natural capital underpinning regional climate regulation and ecosystem services that enable agricultural productivity in the region, identifies countries and actors relevant to the client’s interests driving deforestation through agricultural demand, discusses the risks and costs associated with the collapse of these ecosystem services, and the potential costs of mitigating these risks. All chapters investigate quantification methodologies for a specific ecosystem service, and how that can be used to assign value to specific natural capital stocks. This analysis provides a proof of concept for natural capital stock valuations based on a single ecosystem service— a complete stock valuation, encompassing all ecosystem services provided at a site, is necessary for investors looking to leverage quantifiable “returns” from proper stock management. Key findings- • As natural capital develops and matures as an asset class, frameworks to comprehensively quantify stock values should encompass all ecosystem services provided to avoid “cheapening” nature by oversimplifying valuation methods. • For natural capital asset managers, purchasing stocks of depleted terrestrial forest/mangrove forest/farmland presents a vast opportunity to generate stable, meaningful returns by improving natural resource management practices to maximize ecosystem service outputs. • For each ecosystem type outlined, the ecosystem service valuation framework can be used to justify conservation and restoration measures. • The most appropriate investment mechanisms will vary between natural capital types, depending on the stakeholders who rely most on specific ecosystem services. • Beyond just natural capital asset management, insurance instruments designed for ecosystems, impact investment, and nature-based Carbon Dioxide Removal (CDR) companies all have a role to play in the growing global conservation finance landscape. Furthermore, this project holds significant relevance to Ortec, as each chapter systematically outlines potential climate risks that threaten the prosperity of the ecosystems discussed. It is crucial to comprehend how ecosystem services, rendered by various forms of natural capital, might fluctuate in the forthcoming decades as climate change impacts intensify. For businesses whose supply chains depend on the ecosystem services provided by the highlighted ecosystem types, grasping the potential variations in ecosystem service provision—and understanding how these changes might influence operational risks—is imperative. This work is highly pertinent in the wake of the release of the Task Force on Nature-related Financial Disclosures, put forth by the UN Environment Programme in late 2023, which introduces a framework to “assess, disclose, and manage nature-related risks and impacts by businesses and financial institutions worldwide” (UNEP FI). Nature risk is investment risk; understanding the breadth and magnitude of socioeconomic contributions from ecosystem service contributions is integral to responsible investment management.

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Zepecki, Caroline, Li Jia Go and Bryan Graybill (2024). Distribution of Natural Capital Financing in Markets. Master's project, Duke University. Retrieved from https://hdl.handle.net/10161/30602.


Dukes student scholarship is made available to the public using a Creative Commons Attribution / Non-commercial / No derivative (CC-BY-NC-ND) license.